Review: Managing in Turbulent Times

Managing in Turbulent Times by Peter F. Drucker
My rating: 5 of 5 stars

Drucker's career as a business thinker took off in 1942, when his initial writings on politics and society won him access to the internal workings of General Motors (GM), one of the largest companies in the world at that time. The resulting book, Concept of the Corporation, popularized GM's multidivisional structure and led to numerous articles, consulting engagements, and additional books. While GM, however, was hardly thrilled, I became enamored of Drucker’s scholarship as a GM employee in the late 90s. This is one of the books that has lingered unread in my collection since leaving GM. I decided to dive in and see if I was still impressed by his cognition. In the first, I would say quarter or so, I thought the work was filled with meaningless platitudes that I could see little value in and felt this was headed to a 2-star review and my final Drucker reading.

The after fifty pages or so, my interest was piqued my his foresight of the internet and information age:

A major impact is going to be in communications. Until now, electronic communication has largely adapted itself to the traditional definition of voice, vision, and graphics as distinct separate kinds of communication. From now on, electronics will increasingly produce total communications. By the middle of 1980 the Business Communications Satellite (a joint venture of IBM, Xerox, and the American satellite company Comsat) should be in operation in the United States. It will make possible simultaneous and instantaneous electronic transmission of voice, of vision, and of graphics (such as documents or charts). This will enable people in twenty-five places anywhere on the face of the globe to be in one visual place where they can talk to each other directly, see each other, and if need be share the same reports, the same documents, the same graphs simultaneously, without leaving their own office or home. The equivalent communications capacity is available in a number of different systems—for instance, in the new telephone exchanges that are being pioneered by the British Post Office and by competitors to the Bell Telephone System in the United States.

As a result, business travel on the airlines has probably passed its peak. Such travel was one of the growth industries of the post-World War II period. It should increasingly become less important, although its place may well be taken (and taken with a vengeance) by travel for vacation, learning, and sheer curiosity, defined as non-business travel. But business travel should become less and less necessary. It will be possible for executives to get together without moving that heavy, inert object, the human body, and inflicting upon it stupefying hours of vibration in stale air. Increasingly, we will be able to meet "in person" without having to move the person.

An equal or more important change will be the ability to substitute electronic transmission of graphics for the shipping of heavy paper. Marshall McLuhan made the headlines in the sixties by predicting that the electronic "message" would replace the old traditional "medium," the printed word, the graphic information. This has not happened and it will not happen. On the contrary, electronics are becoming the main channel for the transmission of graphic, printed information. Until today, we had to put a few grains of ink on half a pound of heavy cellulose through a printing process, and then to transport the inert mass of cellulose over long distances, to be finally hand-carried to the individual audience, slowly and at great cost. But today almost everyone has two printing plants in his home, the telephone and the television set…

Of course, he foresaw the turbulence due to come:

The examples given above are not a listing but a sample. What is clear is that the tremendous amount of new knowledge produced in the last thirty years since the end of World War II is now beginning to have an impact on technology. Knowledge is becoming performance, and this means rapid change. The technological change is only a part of the story; social change and social innovation should be equally important. It is highly possible that we can anticipate a period of rapid change in a great number of areas, regardless of the attitude of the public toward technological change. Resistance to change may make it more expensive but is unlikely to slow it down. Resistance to change may mean that economic leadership tomorrow passes from old to new countries, and from old to new industries. In the late nineteenth century Great Britain lost her leadership, which passed to Germany and the United States. And in the period after World War II the Japanese, precisely because they were in many ways technologically backward, could gain leadership in an area that traditional Western industry had largely neglected— high-technology consumer goods. Such shifts may happen again, are indeed likely to happen again. But this does not alter the fact that technology is changing rapidly and that innovation, both technological and social, is speeding up and is likely to change the structure of economy and society.

And the blogosphere would not have surprised Drucker:

In publishing, one trend is clearly toward very large systems: a national or worldwide system for the electronic communication of graphics would be very big indeed. At the same time, the conversion of every telephone or television set into a printing plant offers unlimited opportunity for a truly small publication, such as the specialized magazine for the beekeeper that cannot count on more than 10,000 subscribers in the United States, and maybe not more than 25,000 worldwide. If transmitted over the television set, such a magazine might well become economically viable.

This may be pointing out the obvious or maybe “too soon”, but Drucker does it so well. But is he an overly optimistic Cassandra:

There is only one country left where a migration will still continue: the United States. America can expect large-scale migration from Mexico, a very poor country with one of the largest labor surpluses and one of the highest unemployment rates, yet located next to the richest country and one of its richest areas, the Southwest, with a very low supply of indigenous young people for traditional jobs.

There is no way to prevent mass migration from Mexico over an open 2,000-mile border into the United States, both into the Southwest from San Diego to Denver and into the metropolitan areas of the East and Midwest—New York, Philadelphia, and Chicago—with their already large Hispanic populations. Indeed, the Reconquista of southern California by Mexican immigrants has already begun. By the year 2000, Hispanic-Americans should account for some 50 million of an American population of 250 million; they are about 15 million now. Whether they are officially "legal," "illegal," or "quasi-legal" is immaterial. In any event, the Southwest of the United States may be the only region in the developed world to show a sizable growth in traditional manufacturing industry over the next twenty or twenty-five years.

Socially and culturally, a mass migration of Mexicans to the United States will exacerbate racial and ethnic tensions. With a near-majority in America becoming Roman Catholics in a country of the "Protestant ethos," religion might become a political issue again. There might even be a "black backlash" as the "Chicanos" from Mexico threaten to displace the American black as the officially "disadvantaged" and thus officially privileged "minority." But these are exactly the problems the United States is used to and has handled—or mishandled—throughout all her history. Economically, the mass migration from Mexico, whatever the labor unions might say, should be beneficial and should in fact endow American manufacturing with competitive strength such as it has not known for quite some time.

The modern concept of globalism arose in the post-war debates of the 1940s in the United States. Drucker often refers to that era as the germination of much contemporary economics and sociological trends. I think he expresses a perceptive and advanced understanding of globalist worldview and deservedly employs different adjectives to talk about “integrated trade” and “transnational.”

We are about to enter the stage of integrated trade, for this is what production sharing means. Yet economists, theoreticians, and policymakers are totally unprepared for the challenge. In fact, the lack of concepts and of measurements is a serious problem. Our concepts cannot as yet handle production sharing.

A government statistician will record the export of hides from America as "exports" and the import of shoes as "imports"; his figures will nowhere relate the two. The American cattle grower does not even know that his livelihood depends on the sale of foreign-made shoes in the American market, for hides represent the margin between breaking even and making a profit for the livestock grower in Nebraska. Nor, conversely, does the Haitian manufacturer of the soles for these American shoes realize that he depends on hides grown in the United States. No one yet perceives the relationships. And when shoe workers' unions in the United States or shoe manufacturers in North Carolina agitate for a ban on the importation of "cheap foreign imports," no cattle grower in the Great Plains realizes that they are actually agitating to ban the export of American hides on which his livelihood depends. When the American tanning industry—as it does— asks for a ban on sending hides abroad, American shoe retailers (let alone American consumers) do not realize that this would mean having no shoes to sell in American shops. They do not know that there are not enough American workers available to do even a fraction of the tanning needed.

I wonder if that shoe manufacturing analysis still holds? This resonated with me since the US government announced last week a 25% tariff on all single malt scotch whisky imports as part of a wider set of tariffs aiming to punish the European Union. Well, I know making Scotch requires the oak barrels from manufacturers of American bourbon. Especially in this day of so many small business craft spirits, what of artisan distillers whose margins require selling of their barrels to scotch makers selling to the American market?

This book contains history lessons the development of the nation concept and how the current changes may be redefining that in a thought-provoking section “The End of Sovereignty”.

The modern national state was built on the theorem that political territory and economic territory must be congruent, with the unity of the two forged by governmental control of money—a startling heresy when it was first propounded in the sixteenth century. The code word for this new politico economic unit was the term "sovereignty/' Prior to the late sixteenth century, economic and political systems were quite separate. Money was basically beyond political control except insofar as the Prince made a substantial profit by reserving to himself the right to mint coins. Commerce before the seventeenth century was either transnational or purely local. In the Europe of 1500, before the long inflation of the sixteenth century destroyed the economic system of the time, long distance trade was carried out by trading cities, the sixteenth century equivalent of the multinational corporation of today, and equally controversial, equally criticized, equally reviled. The domestic economy was organized around a market town, which was the center of a self-sufficient agrarian economy in which money, while used to calculate, was only in very limited circulation. And long-distance trade and local market town economy were almost completely insulated from each other, the former with free-market prices, the latter with rigid price controls.

The modern national state was born with the assertion that money and credit have to be controlled by the sovereign and that the economy has to be integrated into the political system, if only to provide the Prince with the means to recruit and pay his mercenaries. The modern national state created national markets within which both long-distance commerce and local trade were unified. "Sovereignty" reached its logical climax in Keynes's theories of the late twenties and early thirties which, in effect, proclaimed that a country—or at least a major country such as the Great Britain of his day—could manage its economy irrespective of the world economy, and largely independent of economic fluctuations and business cycles, by managing and manipulating money and credit.

This leads to descriptions new to me of the Eurodollar and wonder how Drucker would opine on cryptocurrency.

In another intriguing section “The Employee Society”, Drucker suggests a employee-driven socialistic First World that is a point of view I have never considered. It rings as true as it is contrarian when I read it.

In the social sphere, management in the developed countries faces its greatest opportunity and its greatest danger in the next few years. Society in the developed countries has become an employee society. This offers management the opportunity to establish its legitimacy on a new, strong, and permanent basis. It also threatens management with the loss of both legitimacy and autonomy. The labor union is threatened with loss of function, but the power vacuum left by management gives it one last chance of perpetuating its power even though it no longer can serve its original social purpose. In every developed country, employees through their wages and salaries receive most—almost all—of the national product.

In every developed country, between 85 and 90 percent of the economy's product is being paid out in the form of wages and salaries. And most of the rest is in effect also salary; the compensation of the self-employed, whether professionals (such as physicians) or shopkeepers, is not "profit" and surely not "return on capital," but compensation for labor service rendered. Even the bulk of the reported "earnings" of American business are actually also employee income, that is, deferred wages. They are primarily used to build up employee retirement funds or are being paid to such funds as dividends on the securities they hold; together, these two items account for something like two-thirds of the post-tax earnings of American business. There is very little actually left to cover the costs of capital and to form capital for the future.

This leads Drucker to consider a difficult path forward for classic labor unions.

The emergence of the employee society also creates a new
center of turbulence in the labor union. Its very survival is
endangered by the fact that our society is an employee society,
in which businesses exist primarily for the employees' benefit,
and in which the employees are the only "capitalists," the only
true "owners." Once 85 percent of national income goes to
employees, the labor union has lost its original rationale: that of
increasing the share of the national income that goes to the
"wage fund." All one labor union can do is increase the share
of its members at the expense of other employees. The unions
thus become representatives of a special interest that holds up
the rest of society through the threat of power, rather than the
representatives of a "class," let alone the representatives of an
"oppressed majority."

Federalist No. 10 is an essay written by James Madison as the tenth of The Federalist Papers. No. 10 shows an explicit rejection by the Founding Fathers of the principles of direct democracy and factionalism. In that spirit Drucker attacks the narrowly focused, fanatic activists in “The Power of the Small Minority”.

Such a process is doubly important in a pluralist society in which small, single-minded, often paranoid groups have attained a power out of all proportion to their actual size. The theory of the modern state presumed that there would be a "majority" and a "minority/* and that out of their interplay a national "general will" would emerge. It assumed further that both, majority and minority, would be concerned with the entire spectrum of social and political decisions. Everything else was considered to be "faction," evil and nefarious. The modern political party arose as a means of integrating "factions" into the general good and the general will, and of converting "factions" into "programs." Since Edmund Burke in England first opposed the integrating power of party to the factional extremism of the French Revolution, the concept of the integrating party has been central to modern political theory and modern political practice. The change back from integrating party to confrontational faction began in the early years of this century. One agent of the change was the labor union…

Any individual or group that believes in one supreme value, other than a revealed supernatural truth, is by definition paranoid. The rest of us are sane precisely because we know that the world is complex and that there is no one ultimate value…

 The small group with its single-minded dedication to one absolute can be called "paranoid" also in a different meaning of the term. It refuses to admit that it could possibly be wrong or could possibly use the wrong means to its end. If the results are not what it expected, that is only additional proof of the powers of evil. It is never taken as an indication that the group might have been wrong, let alone that its efforts were misdirected. No American prohibitionist could ever admit, for instance, that all the Prohibition Amendment did was make drinking fashionable, despite the overwhelming evidence to that effect.

What this oracle saw developing was a pervasive politicization of the business landscape. It really feels like today from Facebook rants to Mattel’s first gender-neutral doll, that his has come to pass.

The demands of the new political environment may sound like "big company stuff." But the politicization of all institutions makes demands for leadership and activism on the management of all businesses, including the medium-sized and even the small ones. In fact, medium-sized and small businesses often have to devote more time to issues that are not directly concerned with economic performance, and often have to give more, and more effective, leadership. Where the big company, whose chief executive may sit at the Business Round Table, deals with national and international issues, the medium-sized or small company may find itself dealing with local or state matters. It might have to work indirectly through a trade association or an industry association rather than directly with the top people in government. But the demands on time, policy, and character remain the same. Equally, the managers of non-profit public service institutions face the same demands and have to take on similar tasks.

Whether a business is very large or quite small, it operates and lives in a society in which the main needs of the community are being discharged through institutions that were originally designed for single-purpose performance only. No matter whether the business—or hospital or university—is large or small, management will have to accept that society looks to its institutions to attain ends unrelated to the institutions' own purposes, such as preferential employment for "minorities" on the university faculty regardless of scholarship and teaching ability. Managers will have to learn Managing in Turbulent Environments 221 to operate in a political environment, in which the dynamics have shifted to small, single-minded confrontational minorities that can veto, and away from majorities that represent a consensus and can act…

Well, now I see five stars.

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